All eyes on CBS dividend

February 18, 2009

CBS reports its quarterly earnings later today and expectations are… well… low. That’s not surprising to anyone who has watched a parade of bad numbers coming out of the other big media companies this quarter. Viacom. Time Warner. Walt Disney. News Corp. There were few positive notes in any of them.

CBS isn’t likely to break that streak.

So the big questions on the minds of analysts and investors when it comes to CBS are 1). Will it take another big writedown after the $14 billion impairment charge it took last quarter and 2). Will it cut its dividend?

We explored the dividend issue in a piece last week, pointing out that CBS is facing a big debt payment, dwindling cash flow, and must contend with an awful advertising environment. It needs to conserve cash, and could have no option but to cut its dividend (some are calling for it to abandon the payment altogether).

Today, UBS analyst Mike Morris issued a research note ahead of CBS earnings that addressed the dividend question. Here’s what he wrote:

Perhaps more important is the potential for a change to the company’s dividend policy. Currently CBS shares pay a dividend of $1.08 annually for a yield of 20.5% at the current $5.25 share price. As we have previously noted, we view a dividend cut as possible given our estimate of lower cash flow in 2009 and management’s commentary on the 3Q08 earnings call that the dividend is a function of free cash flow. However, we believe that the size of a dividend cut may surprise investors (we expect a cut to $0.30 per share annually, which would imply a 5.7% yield at current levels).

If CBS does cut its dividend either this afternoon or in the coming days, it will be interesting to watch the reaction of investors. The dividend has been a big reason for buying CBS stock. Still, investors realize that companies, including CBS, are well-advised right now to keep some spare cash on hand, so may be accepting of a dividend cut. But how much is the right amount? Cutting it to 50 cents annually? 30 cents? Zero?

(Photo: Reuters)

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